[Disclaimer: I've never heard of this technique before, it just looks interesting so I've done a few searches and here's what I think I've found out. Hopefully someone who knows what they're talking about will contribute too...]
I think it's supposed to be a better way of generating branch coverage tests, not a complete substitute for path coverage. There's a far longer document here which restates the goals a bit: http://www.scribd.com/doc/7328935/Basis-Testing
The onjava article says "the goal of basis path testing is to test all decision outcomes independently of one another. Testing the four basis paths achieves this goal, making the other paths extraneous"
I think "extraneous" here means, "unnecessary to the goal of basis path testing", not as one might assume, "a complete waste of everyone's time".
I think the point of testing branches independently, is to break those accidental correlations between the paths which work, and the paths you test, that occur with terrifying frequency when I write both the code and an arbitrary set of branch coverage tests myself. There's no magic in the linear independence, it's just a systematic way of generating branch coverage, which discourages the tester from making the same assumptions as the programmer about correlation between branch choices.
So you're right, basis path testing misses your bug, and in general misses 2^(N-1)-N bugs, where N is the cyclomatic complexity. It just aims not to miss the 2^(N-1)-N paths most likely to be buggy, as letting the coder choose N paths to test typically does ;-)